June 20 Federal Reserve Preview

The common speculation, which is all that this is, is a concerted effort for QE or renewal of Operation Twist will be re-engaged by the Federal Reserve in their decision to be released around 12:30 ET today. In reality there are some issues with this and using my magic dartboard I see no reason that I can not engage in the same type of mindless attempts to win the Fed lottery like “real” financial journalists.

It is for that reason that I think just before noon today the stock market will start surging as speculators will gamble on a major Federal Reserve move to add liquidity to the markets. The problem is that there is already too much liquidity in the markets and those funds added already are just sitting on the Fed balance sheet instead of moving down to Main Street, USA as it used to in the past. The Fed nor the Congress can force banks to lend money, especially with the distortions imposed on them by the idiotic results of Dodd-Frank. Hence this is what I think the Fed will do today:

Nothing.

The statement will promise platitudes and future action if necessary, concerns about Europe and employment, but in the end Operation Twist will be allowed to expire on schedule, there will be hints of possible QE in the future and observations about the stress on the U.S. economy. In the end however, our Central Bankster understands reality, so let us take a look at it together.

1. The Fed Balance Sheet is already a bloated mess

The Federal Reserve has been warning yet few believe them that they are tired of cleaning up the mess the politicians are making. The only weapon they have is to warn about the bloated budget deficits and excessive spending plus the lack of fiscal discipline to dispose of the problems a coming Taxmeggedon will create in January. So why buy more Treasuries to reward slothful, lazy incompetence? I think today they draw the line today and fire a shot across the Obama regime’s and Congress’ bow.

Next the idea of buying mortgage securities to “improve” the real estate market appears to be a joke also, as the chart below demonstrates:

While buying all of that MBS the housing market rallied strong, all the way back up to 1964 levels. In other words buying more securities will do nothing but take garbage off the balance sheet of speculators and do nothing to provide liquidity for more potential buyers as the pool of qualified buyers is too small to have any impact on the market at this time. By removing the private sector as the primary investor and lender for housing by usurping their ability to determine risk and reward via regulation and a quasi-monopoly owned by the government, there is no incentive for banks to enter the real estate markets except on a limited basis. Thus why bother buying more securities, especially when vintages from 2000-2004 are now seeing downgrades in quality as defaults and late payments start to expand again in this stagnant economy.

2. One Bullet

The Fed has exactly one bullet left. In 2008-2009 they fired almost everything they had, lied about debt monetization, and begged the Federal government to become re-engaged in some sort of fiscal discipline and structural reforms for the tax system. Nothing was done and thus everything that created crisis in 2007-2008 is back in play as the economic “recover has proven to be nothing more than a Fed sponsored mirage that failed to convince small to medium sized businesses to expand back to pre-recession levels. This means the Fed knows the QE bullet must be saved for the absolute last possible moment and not wasted because of the demands of some financial television failed hedge fund trader or political hacks in D.C. If they start QE now and it fails by September-October, the boost in the stock market will be overwhelmed by world events and the election leaving them no alternative if the economy is still faltering but the big nuke of NIRP, or the Swedish negative interest rate model. That is one more reason to suspect today will be nothing more than a verbal promise to act if need be.

They might well act but this entry spells out why I think today will be another non-event and the stock markets will re-asses the situation, wait for the Obamacare decision and decide at that point whether this rally can be sustained or the correction accelerated. Too bad the drama and television coverage will once again be over rated and over the top as reality spells out that there are very few plans of action left for the academics running America’s central bank.